SRA updates its AML Risk Outlook

AML Risk Outlook

Money laundering

Why this risk matters

Trends

  • The number of Suspicious Activity Reports (SARs) submitted by the legal sector has risen for the first time in seven years, but is still disproportionately low.
  • Reports to us relating to money laundering have increased over recent years, with around a third relating to residential conveyancing.
  • HM Treasury have recently expanded their enforcement powers under sanctions legislation. These regulations reinforce the obligation on law firms to report to the Treasury if they act for anyone subject to financial sanctions. Significant financial penalties can be applied for serious breaches.
  • The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 are now in force. The new obligations cover a range of areas including:
    • client due diligence
    • policies, controls and procedures
    • a central register of beneficial ownership
    • politically exposed persons
    • registration of trust and company service providers
    • criminality testing.

Actions

  • We expect all law firms to comply with their legal obligations.
  • The government has specifically targeted its ‘Flag it up’ campaign at helping solicitors and accountants identify potential money laundering signs.
  • The Office of Financial Sanctions Implementation have updated their guidance, and released a quick guide.
  • We will be updating our guidance on the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 during 2017. We are working with other regulators across the UK to provide a consistent approach.
  • Any action we take in relation to breaches of the new regulations will be proportionate and in accordance with our enforcement strategy.
  • We recognise the short lead-in time businesses have been given to implement the new requirements. We will take a proportionate and pragmatic approach as firms take steps to comply with the new requirements.

BSB to amend Standard of Proof for misconduct

Watchdog to lower standard of proof in barrister misconduct hearings
Prosecutors of barristers accused of breaching professional rules will no longer have to meet the criminal standard of proof, the watchdog for the profession has announced.

The Bar Standards Board said that it would amend the standard of proof applied when barristers face disciplinary proceedings for professional misconduct.

It had held a public consultation on the proposal, which still needs to be approved by the Legal Services Board, the overarching regulator of all lawyers in England and Wales.

If the proposal is approved, the standard of proof will change from the criminal definition, beyond reasonable doubt, to the civil standard of on the balance of probabilities.

Board officials said that the move “will bring the Bar’s disciplinary arrangements in line with most other professions”.

It will also provide a boost to the Solicitors Regulation Authority, the watchdog with direct responsibility for the largest branch of the legal profession. The authority has for some time been battling with the Law Society, the body that represents 130,000 solicitors in England and Wales, over its aim to make the same change.

The Law Society has argued that because solicitor disciplinary tribunals can strike off lawyers and effectively bring an end to their careers, the highest standard of proof should remain in place.

The Bar Standards Board said that the revised approach would require “a period of preparation” at the Bar Tribunals and Adjudication Service. Therefore, it anticipated that the reform would not come into effect until the end of March 2019. “The revised standard will complement other changes that we have made recently to improve our rules and processes,” Sara Jagger, a BSB director, said.

Trinity Indemnity now working with Audit Compliance Ltd

We are delighted to announce that Trinity Indemnity is working closely with Audit Compliance Ltd in preparing specialist products for the legal sector.

Trinity Indemnity is now an AR of Bluefriars Brokers and is registered with the Financial Conduct Authority Reference number: 791358

 

 

Solicitor helped himself to money in client account after ‘tidying -up” exercise

A solicitor who helped himself to client money while carrying out what he claimed was a “tidying-up” exercise of historic client account balances has been struck off by the Solicitors Disciplinary Tribunal (SDT).

The tribunal decided [1] that Vernon Burke’s actions showed a “lack of moral soundness, a lack of rectitude and no adherence to an ethical code”.

It said Mr Burke had “maintained that bills had been sent out but had provided no evidence to support this assertion and he had not been believed in this regard”.

Acknowledging that this was a “sad case”, the SDT went on: “If the tribunal did not strike the respondent off, there was risk of harm to the public, not from the respondent who the tribunal considered would have learnt his lesson, but from the message that would be sent to the profession that it was acceptable to help oneself to small amounts of client money if subsequently it was repaid.”

The tribunal said client money was “sacrosanct” and had to be safeguarded.

Mr Burke, 57, was a sole principal, practising family law from Bridge Burke Solicitors in Kingston, Surrey, since 2005. He qualified in 1992.

The Solicitors Regulation Authority (SRA) found out in 2015 that the firm’s accountant’s report had been qualified the previous year for having debit balances on client account. An investigation was launched and Mr Burke was referred to the tribunal last autumn.

The tribunal said Mr Burke was not a “credible witness”, and was “evasive” in his oral testimony, often failing to answer the questions he had been asked.

There were “stark inconsistencies” in his evidence, which the tribunal described as “wholly unconvincing”.

Mr Burke was found to have acted dishonestly and with a lack of integrity when he “cleared off residual balances on client accounts to a total value of £3,826 by issuing bills of costs and paying them from client funds when there was no proper justification to do so and without first sending those bills or other written notifications of the costs to the relevant clients”.

The tribunal said a “solicitor of integrity did not clear off residual balances, however small, without first taking steps to be absolutely certain he was entitled to the money”.

If there was no evidence on the files, he would “simply rely on his memory as to the work he thought he had done for each client”.

The SDT said that Mr Burke had argued that 17 bills were sent as part of a “tidying-up” exercise, but it found that the evidence did not support this – all the bills were for precisely the amount on client account and marked as paid the day after they were raised.

Everything pointed to the raising of the invoices as being a “paper exercise”, it found.

“Had this been a genuine ‘tidying-up exercise’, then an honest solicitor looking at his residual client balances and determining what could be billed would take steps to assure himself that the monies were due and would also have ensured that the bills were sent to the clients.”

The invoices were all reversed during the SRA’s investigation, but Mr Burke argued that this was about returning to a “state of compliance” rather than an admission of dishonesty,

Mr Burke admitted the other three charges against him, primarily improperly withdrawing a total of £47,205 from client account mainly as a result of transfers being made by the firm in excess of funds held by the client, although the withdrawals were all eventually rectified.

He also admitted failing to carry out reconciliations and operating two suspense ledgers in breach of the accounts rules.

On sanction, the tribunal said the mitigating factors were that once the SRA investigation had started, the “loss to the clients was made good”, and the misconduct was a “single episode in a previously unblemished career”.

However, an allegation of dishonesty had been proved against Mr Burke and there were no exceptional circumstances. It ordered that he should be struck off and pay £21,000 in costs.

Lawyers face prosecution over financial sanctions compliance

Passmore: Risks exist for every single solicitor and law firm

Lawyers are among those who could face prosecution if they fail to report information that could undermine UK financial sanctions, after a change to the law [1] that came into force this week.

“Independent legal professionals”, along with trust or company service providers, accountants and others are now captured by the European Union Financial Sanctions Regulations 2017.

The existing regulations already placed an obligation on businesses to report to the Treasury if they were acting for anyone subject to financial sanctions, but until Tuesday enforcement action could only be taken against financial services firms.

Those caught by the new regulations will commit an offence if they fail to inform HM Treasury if they know or have reasonable cause to suspect that a person has committed an offence under the relevant regulations – such as dealing with funds that must be frozen or activities that circumvent an asset freeze – or is a person who is the subject of an asset freeze.

There are sanctions placed on people and entities from 25 countries around the world – from Afghanistan to Zimbabwe – plus ISIS and al-Qaeda.

Crispin Passmore, the SRA executive director for policy, said: “The new financial sanctions regulations mean legal firms are obliged to comply with the reporting regime. These regulations, and the approaching Financial Action Task Force inspection, are further reminders of the importance the UK and global community places on tackling terrorist financing.

“Risks exist for every single solicitor and law firm whether conveyancing on the high street or handling global transactions, and each should be thinking about their responsibilities for tackling these issues.”

Guidance [2] from the Office of Financial Sanctions Implementation (OFSI) said lawyers are not required to provide information that is subject to legal professional privilege.

But it continued: “OFSI expects legal professionals to approach their disclosure obligations with rigour and carefully consider where legal professional privilege applies, and to what information.

“OFSI will challenge any blanket claims of privilege where we are not satisfied that such careful consideration has been made.”

Diversity data collection SRA

You will be able to report your firm’s diversity data to us from the week beginning Monday, 17 July, and will have four weeks to complete this.

You can start collecting this data from your staff ahead of time using the new diversity questionnaire available on our website. In line with our latest advice about transgender inclusion, we have included a new question about transgender and an option for people who do not identify as male or female.

If you have already collected your data using the old questions, you will still be able to use this for reporting. We are working on our website to make it easier to report. You can report your data from the week beginning 17 July. Meanwhile, you can view data you provided previously up until 14 July. To do so, you will need your mySRA account username and password. If you have forgotten your username or password, please visit our website to see how you can request them.

We have emailed firms to let them know about this. Find out more about firm diversity data requirements.

AML regulations – update SRA

AML regulations – update

We are working through the new Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations, which came into force on 26 June this year.

The regulations place new requirements on firms and on us as a “supervisor” – those who regulate or oversee the work of professionals – to tighten up controls to prevent money laundering and terrorist financing. A particular focus of the new regulations is transparency; both in terms of firms being aware of who they are dealing with, and also supervisors being aware of and approving those who work within relevant firms.

We will soon publish an assessment of the regulations which will set out our views on the international and domestic risks of money laundering for firms we regulate. We are also required to collect data on our firms that are offering services set out within the regulations.

We will have to approve beneficial owners, officers, managers and sole practitioners of those firms. Our intention is to write to firms to ask whether they are performing any of the activities caught by the money laundering regulations.

We expect to do this over the winter, but in the meantime we are not asking firms to apply to us for approval under the Money Laundering Regulations. We also expect that you should all be familiar with your obligations to prevent money laundering, and the new requirements under the 2017 Money Laundering Regulations.

SRA to remove insurance obstacle to switching regulators

The Solicitors Regulation Authority (SRA) is to change its indemnity insurance rules to make it easier for law firms to switch regulator, it announced yesterday.

In a bid to encourage competition, the SRA will ditch the requirement that firms switching to another approved regulator have to buy run-off cover.

Under the change, the new regulator will be solely responsible for making sure there is adequate indemnity insurance available for future claims, including claims for work carried out or started before the switch.

This would provide a “clean break between regulatory regimes”, as well as clarity for consumers, and remove the potential for overlapping cover.

The SRA said it was working with the other regulators to agree a protocol and put in place a framework to share information when firms want to switch, so as to maintain client protection.

The change is subject to approval by the Legal Services Board (LSB), but the SRA hopes to have it in place for the coming indemnity year.

In the original SRA consultation a year ago, the regulator put forward formalising a waiver policy from the minimum terms and conditions of insurance for firms wanting to switch, but it has concluded that “a better approach” was to amend the terms so that run-off cover is not automatically triggered when a firm switches.

SRA policy director Crispin Passmore said: “The current approach makes it difficult for firms to be able to switch to the regulator they feel is right for their business. This change would give firms that choice, encouraging a modern, competitive market that provides affordable and accessible services for the public and businesses.

“We recognise that although such a change could have benefits for consumers, there are potential risks around protections for clients. We are therefore working closely with the other legal regulators on a switching protocol.”

The change was in part prompted by the fact that some law firms wanted to switch to the Council for Licensed Conveyancers (CLC).

In a statement, it said: “The CLC is pleased that the SRA has decided to remove a barrier that has prevented lawyers from exercising their right to choose the most appropriate regulator for their business…

“We are already working with a number of firms who have been waiting for this announcement from the SRA. Any other firm considering moving into the CLC’s regime for specialist conveyancing and probate lawyers should contact us as soon as they begin to think about the possibility.”

The change also reflects an underlying feature of the Legal Services Act 2007 that promotes competition between regulators.

In the consultation, the SRA said: “We are conscious of the risk that competition between regulators may indirectly lead to outcomes that are not in the public or consumer interest.

“That might happen, for example, if regulators were to reduce consumer protection or avoid disciplinary or enforcement action below an optimal level, simply to attract and retain a larger number of firms.

“However, the LSB approves each regulator’s regulatory arrangements. Thus we can be confident that each regulator’s arrangements, including their arrangements for professional indemnity insurance, are appropriate.”

SRA looks at the public’s experience of conveyancing

SRA looks at the public’s experience of conveyancing

We will be researching the experiences of people who have used conveyancing services offered by solicitors.

Around 1,000 former conveyancing clients will be asked their views on the legal aspect of their house purchase or sale. We will use this information to help shape the way it regulates. Independent researchers, IFF Research, will ask the public for their experiences of the conveyancing legal process, looking at access, choice, quality and cost. The study will draw out good and poor practice, and any specific areas of concern that we might need to address.

The project will also look at a number of specific issues, including how people think technology is speeding up and simplifying the process and their experience of any risks, such as cybercrime.

Crispin Passmore, SRA Executive Director, Policy, said: “The research will play an important role in increasing our understanding of the conveyancing market. We want to know how it is changing, and how changes elsewhere – such as fixed fees and technology – will affect the experiences of solicitors and those who use their services.”

We conducted research on solicitor experiences of conveyancing in 2013. Further information can be found here:

Go to the 2013 research

We paid out £10 million to the public last year (November 2015 to October 2016) from its Compensation Fund. More than £1million of this related to conveyancing matters, paying grants to replace stolen funds that were intended for house deposits.

The latest research project aims to report back in the autumn.